The renminbi weakened on Monday beyond Rmb7 per US dollar for the first time since the 2008 global financial crisis, breaching a floor that China's central bank has previously defended as the prospects of a trade deal between Beijing and Washington fade again.
The onshore exchange rate for the renminbi, which is permitted to trade 2 per cent on either side of a daily midpoint set by the People's Bank of China (PBoC), fell past Rmb7 on Monday morning for the first time since May 2008, dropping as much as 1.3 per cent to Rmb7.0297 per dollar.
In a statement, the PBoC blamed trade protectionism and tariffs on Chinese goods for the currency’s weakening, without specifically mentioning the US, but added that it “has the experience, confidence and capacity to keep the renminbi exchange rate fundamentally stable at a reasonable and balanced level”.
Monday’s midpoint of Rmb6.9225 was the lowest since December, when trade tensions were last at fever pitch. Year to date, the onshore rate has weakened 2.4 per cent against the dollar.
The renminbi's latest decline comes on the heels of a rough week in which it dropped 0.9 per cent against the dollar after US president Donald Trump suddenly escalated trade tensions with China, rattling global markets and triggering a sell-off in equities and a flight to government debt on Friday.
Trump announcement
Mr Trump announced on Thursday that he would levy a 10 per cent tax on a further $300 billion (€267 billion) of Chinese goods in early September. On Friday China’s commerce ministry hit back with a vow to retaliate with “necessary countermeasures”.
The weaker renminbi weighed on Asian markets. The Korean won fell 0.7 per cent to Krw1,213.30 to the dollar while the Australian dollar dropped as much as 0.8 per cent to $0.6746 against the greenback.
The yen, seen as a safe haven in uncertain times, strengthened beyond the ¥106 mark against the dollar to trade up 0.6 per cent at ¥105.99, taking it to its strongest level since early 2018.
Asian stock markets were down sharply, with Japan's benchmark Topix off 1.8 per cent, while South Korea's Kospi was down 2.6 per cent. Hong Kong's Hang Seng index tumbled 2.8 per cent amid a strike in the city while China's CSI 300 index of Shanghai and Shenzhen-listed shares shed 1.9 per cent.
Christy Tan, head of Asia markets strategy and research at NAB, said the move to let the renminbi weaken past Rmb7 "could be deemed as part of the response to the new tariffs" from Mr Trump.
She said the renminbi was not Beijing’s preferred tool for coping with the trade war, but “China has definitely run out of goods to impose tariffs on in response to the US . . . and the currency has become one of the policy options”.
Implications
The offshore renminbi, which is less strictly regulated than its onshore counterpart, also fell steeply, sliding as much as 1.9 per cent to Rmb7.1114. Monday morning’s move marked the first time the offshore rate crossed the Rmb7 threshold since it began trading in 2010.
"The market implications of breaching 7.0 are tremendous," said Hao Zhou, economist at Commerzbank. "We will see a new wave of depreciation among Asian currencies in the foreseeable future, and there could be further risk-off movements in the global markets. It looks like a tsunami is coming."
“Cracking seven”, in currency trader talk, is seen as a breach of a psychologically important threshold for the renminbi among ordinary Chinese, who have not seen their currency weaken to the current levels since 2008.
In its defence of the Rmb7 floor, the PBoC in 2016 was forced to burn through much of its foreign exchange reserves, spending as much as $107 billion (€95.5 billion) in a single month, after its shock devaluation of the renminbi in August the previous year that marked the currency’s biggest one-day drop in decades.
The 2015 devaluation, while a short-term boost for the Chinese economy, prompted major capital outflows and drew the ire of critics in Washington, who accused Beijing of currency manipulation and ensured regular scrutiny from the US treasury department.
NAB's Ms Tan said that although the PBoC had allowed the Rmb7 floor to give way, the central bank would step in to prevent capital outflows from increasing if necessary.
“Allowing the currency to depreciate in an orderly and gradual manner – that will be allowed, but speculative activities would not be tolerated,” she said.
– Copyright The Financial Times Limited 2019
